A Time to Repair the Roof
IMF News, October 5, 2017
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- Published: October 5, 2017
Introduction
- Speech by IMF Managing Director Christine Lagarde at Harvard University, October 5, 2017.
- Central question: "Can the world seize the opportunity of the upswing to secure the recovery and create a more inclusive economy that works for all?"
- Framing metaphor: President Kennedy — "the time to repair the roof is when the sun is shining."
Is the Sun Starting to Break Through?
Findings on the cyclical outlook
- IMF projected 3.5 percent global growth for 2017 and 3.6 percent for 2018 (July projection); an updated forecast to be released next week is expected to be more optimistic.
- Measured by GDP, nearly 75 percent of the world is experiencing an upswing — the broadest-based acceleration since the start of the decade.
- Last year 47 countries experienced negative GDP growth per capita.
- Positive contributors:
- Cyclical pickup in investment and trade in advanced economies, especially Europe and Japan.
- Asian emerging markets led by China and India remained strong.
- Outlook brighter for some commodity exporters in Sub-Saharan Africa and Latin America.
- Globally, financial stability is improving due to a more stable banking system and increased market confidence.
- Risks and threats:
- High levels of debt in many countries.
- Rapid credit expansion in China.
- Excessive risk-taking in financial markets.
- Heightened non-economic challenges: weather-related disasters (Caribbean, US, Asia) and geopolitical tensions (Korean peninsula).
- Policy choice:
- Option 1: Delay reforms until the next crisis (politically easier but risky).
- Option 2: Use the recovery to implement reforms now — IMF research suggests reforms are more potent and easier to implement when economies are healthier.
The Tools We Need to Repair the Roof
Fundamentals and macro policy
- Inflation is still low and subdued despite near-full employment in many advanced economies; monetary policy should continue to support the recovery.
- Central banks should:
- Communicate plans clearly.
- Execute monetary policy normalization smoothly, as appropriate in each country, to avoid market turbulence and sudden tightening.
- Fiscal policy guidance:
- Countries with healthier public finances (example cited: Germany and South Korea) can invest more in their economies.
- Countries with high public debt should use growth to reduce debt relative to GDP and strengthen resilience.
- Containing public debt is imperative in many lower income countries where debt levels have risen markedly.
- Reducing excessive global imbalances—investing more where fiscal positions are healthy and lowering deficits elsewhere—can support growth and avoid financial and exchange rate instability.
- Structural reforms are essential alongside monetary and fiscal policies.
Lifting incomes and creating jobs
- Productivity concern:
- In the largest economies, overall productivity growth has dropped to 0.3 percent, down from a pre-crisis average of about 1 percent.
- Policy levers to boost productivity and wages:
- Cut red tape.
- Increase spending on research and development.
- Invest in infrastructure.
- Increase demand where wages are limited by weak demand (high unemployment or involuntary part-time employment).
- Labor market reforms and examples:
- Spain: greater workplace flexibility for employers and employees.
- Mexico: revised rules to allow young people to more easily enter the formal job market and gain access to health care and other benefits.
- Japan: childcare leave benefits expanded from 50 percent to 67 percent of salary as part of efforts to get over 1 million women into the workforce.
- Economic gains from empowering women:
- If women participated in the labor force in the same numbers as men, GDP could increase by as much as 5 percent in the US, 27 percent in India, and 34 percent in Egypt.
Investing in people’s futures and fostering inclusive growth
- Global and within-country inequality:
- Over the past three decades, inequality between countries has declined sharply (rise of emerging markets such as China and India).
- Within some advanced economies, inequality has widened and wealth has concentrated among top earners.
- IMF research: excessive inequality hinders growth and erodes social trust.
- Policies and examples to reduce inequality and invest in human capital:
- India: expanded health care access with clear benefits for the poorest citizens.
- South Korea: bonuses to encourage teachers to work in underperforming schools.
- US: efforts to increase the number of women studying STEM.
- Germany: apprenticeship program as a long-standing model for skills development.
- Canada: on-the-job skills training showing effectiveness relative to classroom learning.
- Preparing for the future of work:
- Automation risks exacerbating inequality as owners of technology gain efficiency while lower-skilled workers may lose jobs.
- IMF exploring a range of options from universal basic income to more progressive taxation.
- Historical tax context: in 1981, the average top marginal tax rate in advanced economies was 62 percent; in 2015, it was 35 percent.
- New IMF research (to be released next week from the speech date) suggests some advanced economies could raise top tax rates without slowing growth.
The Benefits of Cooperation
- Many challenges require global solutions:
- Corruption: IMF committed to do more to help members; bribery alone costs more than 1.5 trillion dollars per year, nearly two percent of global GDP.
- Embezzlement, corporate income tax evasion, money laundering, terrorist financing — all have cross-border dimensions.
- Financial regulation:
- Progress since the crisis (Financial Stability Board and others) on higher bank capital and liquidity.
- Need to protect progress and review implementation where beneficial.
- Trade:
- Over the last thirty years, trade raised global growth and lifted hundreds of millions out of poverty.
- Some groups have been negatively impacted; protectionism is counter-productive, but improvements in transparency and distributional outcomes are warranted.
- Climate change:
- Estimates suggest a 1 degree Celsius increase in a country with an average annual temperature of 25 degrees — such as Bangladesh — could reduce per capita GDP by nearly 1.5 percent.
- International cooperation is necessary to address man-made causes of global warming.
- Role of the IMF:
- Serve as a platform for dialogue and a resource for countries seeking to build more resilient economies.
- The IMF is a critical part of the toolkit as representatives from 189 member nations convene for the Annual Meetings.
Conclusion
- Call to action: Use the current upswing to repair economic "roof" now — invest, reform, and cooperate while the recovery strengthens.
- Inspirational closing: Alexis de Tocqueville — "What is not yet done is only what we have not yet attempted to do." and President Kennedy’s admonition to repair the roof when the sun is shining.
- Closing line: "Thank you very much."
Source: "A Time to Repair the Roof," Speech by IMF Managing Director Christine Lagarde, Harvard University, October 5, 2017.
Content in this bundle
- Full Report (PDF)
- The Role of the Fund in Governance Issues—Review of the Guidance Note
References
- Christine Lagarde
- People's Republic of China and the IMF
- Bangladesh and the IMF
- Germany and the IMF
- India and the IMF
- Japan and the IMF
- Republic of Korea and the IMF
- Speeches
- PRESS CENTER
- World Economic Outlook (Washington: September 2017), Chapter 2.
- [Women, Work, and the Economy: Macroeconomic Gains from Gender
Equity](https://www.imf.org/en/Publications/Staff-Discussion-Notes/Issues/2016/12/31/Women-Work-and-the-Economy-Macroeconomic-Gains-from-Gender-Equity-40915)